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Sunday, September 7, 2008

And they could call it Frannie...

From a recent Wall Street Journal article comes a bold idea: Fannie Mae and Freddie Mac should merge. Outrageous? Maybe, but given the lengthening list of suggestions about what to do with the troubled companies, it’s certainly worth considering as the value of their shares continues to wither. The notion has actually been quietly floating around a small corner of Wall Street for weeks — and has even been tossed around internally at Fannie and Freddie, according to people close to both companies.

Granted, the idea is easily dismissed as a long shot. But with current headlines reminding us that taxpayers are potentially on the hook for tens of billions of dollars to rescue Fannie and Freddie, virtually every alternative should be on the table, alongside other usual-suspect scenarios: from a cash injection to a full-scale nationalization to breaking up the companies into a dozen smaller firms, so that none of them is ever considered too big to fail. By merging them, they would really become too big to fail. And sometimes size can be strength.

A merger wouldn’t undo the mess that these two companies have made, nor does it erase the billions of dollars in potentially toxic loans they own or have guaranteed. Nor would it address the question of whether these companies deserve the implicit backing of the government in the future.

There’s another big, almost insurmountable, roadblock: Let’s call it the monopoly issue. This deal wouldn’t have to get past the Justice Department, but it would have to get past Congress, where the law would have to be literally rewritten since it was Congress that established Fannie and Freddie the first time around.

A brief history lesson: Fannie Mae was founded in 1938 by the government to help bolster the mortgage market under Roosevelt’s New Deal. It become a public corporation in 1968. It was a de facto monopoly until 1970 when Freddie Mac, also backed by the government, came along in order to provide some competition. Now, they are collectively backstopping the $12 trillion mortgage market. For a while, Fannie and Freddie played in different parts of the mortgage industry. But in recent years, they have overlapped — so much so, that some observers contend that they are a monopoly already.

Most mergers fail. And the idea of mating two losers doesn’t exactly inspire the idea you’ll get a winner. But with few practical solutions, this one is as good as any. Now if they could just agree upon a last name – would it be Frannie Mae or Frannie Mac? Maybe we should just get the whole thing over with now and rename it Bubba Bail-out.

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